2. The Blade Division of Dana Company produces hardened steel blades. Approximat
ID: 2475471 • Letter: 2
Question
2.
The Blade Division of Dana Company produces hardened steel blades. Approximately one-third of the Blade Division's output is sold to the Lawn Products Division of Dana; the remainder is sold to outside customers. Blade Division's estimated sales and cost data for the year ending June 30th are as follows:
Lawn
Products
Division
Outsiders
Sales
$15,000
$40,000
Variable costs
10,000
20,000
Fixed costs
3,000
6,000
Gross margin
$2,000
$14,000
Unit sales
10,000
20,000
The Lawn Products Division has an opportunity to purchase on a continual basis 10,000 blades (of identical quality) from an outside supplier, at a cost of $1.25 per unit. Assume that the Blade Division cannot sell any additional products to outside customers. Assume, too, that there are no short-term avoidable fixed costs. Based solely on short-term financial considerations, should Dana allow its Lawn Products Division to purchase the blades from the outside supplier, and why?
Lawn
Products
Division
Outsiders
Sales
$15,000
$40,000
Variable costs
10,000
20,000
Fixed costs
3,000
6,000
Gross margin
$2,000
$14,000
Unit sales
10,000
20,000
Explanation / Answer
Since the there will not be any saving in fixed cost even of purchased from outsider hence fixed cost is irrelevent.
Blade divisionas variable cost per unit = 10000/10000=1
ana should not allow to purchase from outside since the cost per unit from outside is 1.25 where as cost inside is 1. On purchasing from outside will result in extra cost of .25 on firm level.
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